clever: explained in 5 charts: will 2022 be a year of consolidation for the Indian stock markets?

(This story originally appeared in January 05, 2022)

NEW DELHI: Indian stocks emerged as the best performing market not only among its regional peers in Asia in 2021, but they also beat the developed market, although the market has seen some correction in the past month.

2021 has been a dream run with stock prices hitting record highs and initial public offerings witnessing the highest payoff on record. However, the year 2022 could be a year of contrasting narratives – one with caution and one with continued optimism, brokerage firm HSBC said in a research report.

The 2021 rally

The market rally was largely led by abundant liquidity, favorable monetary policy, a better than expected pace of post-pandemic macroeconomic recovery and a strong vaccination campaign. But investors are now worried about whether recent market weakness, with Nifty down 7% since Oct. 18, is any indication that the market may be entering a bearish phase, said Amit Sachdeva, equity analyst at HSBC Securities.

Even the market width – which reached almost 100% in October – is now at 62%, the lowest in a year, highlighting broader consolidation in the recent market crash. “It also suggests to us that the market is no longer overheated and offers selective opportunities,” noted Sachdeva.

The strong recovery of 2021 was led by utilities, industrials, materials and real estate; while FMCGs, healthcare, automotive and the financial sector were the main laggards.

Who was the main rally driver?

Foreign Institutional Investors (FIIs) have clearly been a major driver of the post-pandemic stock market recovery, injecting more than $ 37 billion between April 2020 and March 2021.

However, the IFIs have since become cautious. India has recorded net outflows of $ 600 million since April 2021 due to a high market valuation, a forecast of rising US bond yields and an increase in primary market inflows. More importantly, mainland China is back on the FII’s radar, according to the HSBC report.

And what are the biggest concerns for 2022?

The rotation of flows to other markets in Asia is the biggest concern

But 2022 will see the opposite: According to analysts at HSBC, while 2021 saw money flowing from China to India, 2022 could see FII flows returning from India to China.

American sharpening: The United States has already started to shrink and is expected to double the pace of the reduction after December. HSBC expects a 25bp rate hike in June 2022, September 2022, March 2023 and September 2023, adding further uncertainty to FII flows to equities in emerging markets like India.

The last time, when the US QE tapering was announced in 2013, the Indian equity market lost 15% over a 3-month period, with a more marked drop in midcaps.

However, this time around such a sell-off is unlikely given that India’s foreign exchange reserves have grown 2.2 times since 2013 while the current account is in much better shape than in 2013. Even the India’s annual FDI rate has more than doubled since 2013.

Rising crude oil prices

While crude has corrected from its peak, prices are expected to remain elevated and this remains a key factor influencing volatility in the Indian market due to the country’s heavy reliance on crude oil (oil imports represent 28% of the total import bill).

Other big concerns include a costly assessment and headwinds in the form of anxieties over economic growth, and uncertainty over the spread of the new variant of Covid-19.

On the positive side, many macroeconomic indicators paint a positive picture of the economic recovery in 2022, including prospects for a new investment cycle, continued investment momentum in new generation companies, successful listings and earnings growth prospects for fiscal years 22 and 23..

A plethora of IPOs are coming: Deals worth $ 16 billion have already been announced in 2021, and several new-age companies are already ready for IPOs within the next two years.

“The market’s enthusiasm for new IPOs even increases the implicit pricing of the duration of other profitable listed companies. We believe IPO activity is likely to remain high in 2022 as well and will continue to add to the “risk in” momentum of the market despite successes and failures, ”Sachdeva said.

Building on historical performance, HSBC expects the market to decline another 6-8% from current levels and rebound thereafter.

“Overall, we don’t see a case for a deep correction; the market has already corrected 7% from its recent high, but we do not rule out another similar correction from current levels, before the market turns to its own structural bullish momentum, ”Sachdeva said.

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